April 3, 2020

When would the markets recover?

Amit Trivedi
Owner, Karmayog Knowledge Academy

The market crash and recovery

Why did the markets crash? When would the markets recover?

Many investors are asking the above questions. Some seasoned players seem to be losing faith in the equity markets. The long term returns on many equity portfolios are less than what one could have earned by simply keeping money in bank fixed deposits, which carry very low risk. So, let us try and understand why the markets crash, and also see if the markets would recover at all, and if they do, when. For the former, we would take help from Mathematics, whereas rely on history to understand the answer to the latter part.

Why did the markets crash?

in the world of investing, the present market value of securities is estimated by using the discounted cash flow method. The formula is as under:


During the outbreak of COVID-19, nobody has any idea of the potential impact on the economy of the world or the various individual countries. During his address last week, the RBI Governor Mr. Shaktikanta Das mentioned that the Monetary Policy Committee (MPC) could not estimate the impact of this event on the GDP growth. He did not give any projection for the GDP growth for the next year. That is the level of uncertainty on account of this pandemic. In such a case, the value of the denominator is highly uncertain. In light of such uncertainty, a large number of players rush towards safety. That is exactly what we saw this time around. The markets crashed as if there was no bottom.In the above equation, if the gap between the discount rate and growth is low, the estimated value is high; whereas if the gap is big, the estimated value is low.

The discount rate in the denominator is linked to the expected return from the investment. And as we all know, the expected return is linked to the risks involved in the investment – higher the perceived risk, higher is the discount rate. Higher the perceived risk, higher is the compensation sought for taking the risk.

With the increased uncertainty, equities look extremely risky. So, the discount rate goes up. At the same time, the expected growth rate takes a dip. In fact, this time around many are estimating negative growth rates. Imagine what happens to the denominator of our equation in that case! And when that happens, the estimated value of investments drop.

Let us now turn to the second question:

When will the markets recover?

As mentioned earlier, we will turn to history to understand the answer to this question. However, we will look at something slightly different,  and not a pandemic or an epidemic. We will look at the various wars fought in the last century.

WorldWW1. War I

For more than 100 years, the Dow Jones Industrial Average has been published almost every business day. There have been only two exceptions: The first was during World War I, when the New York Stock Exchange shut down for 4-1/2 months. When partial trading resumed in December, stocks moved above their late-July levels. Foreigners did in fact dump stocks on the exchange, but they were snapped up by American investors. Then again when the US entered the war sometime in 1917, the markets crashed. However, the Dow Jones scaled new heights before the end of 1919, a few months after the war ended.

World War II

WW2The decade after the World War I saw the US markets zooming up, and in September 1929, the Dow Jones had reached all-time high of 381 points. The world was about to enter the Great Depression. (We will talk about the Great Depression some other time.). Right now, we will focus on what happened during the war, which began in 1939. As can be seen from the graph below, the DJIA was hovering around 150 points at that time. Incidentally, the index remained below this level for quite some time during the war. When Germany took Paris in 1940, the Dow Jones nosedived, losing roughly 25%. On 7 December 1941, the Japanese planes attacked Pearl Harbour, dragging America into the war. The markets fell further, with DJIA going below 100. However, from the lows in 1942, the DJIA started an upward journey to cross the level of 150 before the war ended when the Japanese surrendered. The year 1946 began with the index being above 200 points.

The Gulf War (1990-91)

On August 2, 1990 – the day Iraq invaded Kuwait, which ultimately led to the Gulf War – the S&P 500 embarked on a three-month decline of 13.5%. But one year after the initial invasion, the S&P 500 was 10.16% higher than it was on August 2, 1990.

Back home in India, the BSE Sensex was at 1,098.95 (closing value on July 30, 1990) when Iraq attacked Kuwait. It fell continuously for the next three days losing a total of 88.94 points (or 8.09%). On January 14, 1991 Sensex closed at 1,017.22 – the day US attacked Iraq. On January 25, it closed at 956.11, the lowest closing value during that period. However, when Iraq surrendered on February 25, the index was already at 1,177.87. This was 7.18% above the level before the hostilities started.

Kargil War

This was our own war, unlike all the previous discussed above. (We have not discussed the 1962, 1965, or 1971 wars since we do not have Sensex values for that period).

On May 25, 1999 Sensex closed at 4,060.08. On the next day, India launched air strikes. Over the next three days, Sensex lost roughly 7.06%. The index fell on each of the three days. On July 26 – Kargil Vijay Diwas, Sensex closed the day at 4,625.40 points – 13.92% above the closing value of the day before Indian Air Force launched air strike.

World Trade Centre attack: 9/11

This was the second instance in the history when the US stock markets were shut. Which during WWI, they remained closed for 4 ½ months, this time the markets were shut for 4 days. This was not a war, but an attack on the most powerful country – the United States of America.

Sensex closed at 3,150.40 points on September 11, 2001. At around 7 PM India time, the terrorists attacked the twin towers of the World Trade Centre in a heinous act. The next day, the markets started a southward journey to close at 2,600.12 points – lowest during that period. This was 17.47% lower than the level on September 11. However, within a little over two months, the Sensex was back above the 9/11 level. On November 14, Sensex closed at 3,113.04.

What is the pattern here?

In all the cases, when the hostilities started, the markets tanked. However, in all these cases, the level before the hostilities was regained before the hostility ended.

It would be fair to deduce that it is not a war or any grim situation that causes the market decline, but the uncertainty surrounding the same. At the same time, the moment the uncertainty reduces, or some stability or normalcy is visible, the markets move in line with the fundamentals.

Will the pattern be any different this time? Well, only time will tell.


Is it not possible to know such crashes in advance? The question sounds so familiar! In my book Riding The Roller Coaster, the chapter 2.9 on The Sub-Prime Crisis starts with the same question. It was asked by Queen Elizabeth II (See the picture).

Incidentally, and unfortunately, this time around also the royal family is in the news. Prince Charles tested positive for the Corona Virus flu. And, this time around the Queen cannot even ask, “Why did no one see it coming?” It (Corona virus, in this case) came inside the Royal Palace, and nobody saw it entering.

Having said all that, let us turn to Bhagwad Geeta and take one more lesson from there.

Bhagawat gita

In the Shlok 37 of Chapter 2, Bhagwan Krishna tells Arjun that if you die fighting the war, you will get into the heaven; and if you win the war, you would enjoy the earth. That’s why, o Arjun, decide to fight.

Bhagwan Krishna does not tell Arjun what would happen if he fights, but he gives his view on the potential outcomes – if he wins the war, he will rule the earth; and if he dies fighting the war, he goes to the heaven.

The reality turned out to be quite different – Pandavs won the war, but then they decided to give up everything and go to the Himalays. In. that difficult journey, one by one they dies and went to heaven. See the irony, God said, “If you win the war, you would rule the earth, and if you die, you would go to heaven.” Arjun won the war, but did not enjoy ruling the earth. Instead, he went to heaven.

Was Bhagwan Krishna wrong? Well, the events turned out to be different from what he had said. Who are we to try and predict the future?


6 Thoughts to “When would the markets recover?”

  1. Khyati says:

    Brilliant piece Amitbhai!

  2. Srinivasan says:

    Earlier situations analysed and articulated in a manner which even the common man can understand.

  3. Excellent article Amit sir as always. Was a treat to read. Thank you

  4. Nitin Sawant says:

    Wonderful presentation about market

  5. Very insightful and informative article.

  6. Dinesh Jaiswal says:

    Fantastic & excellent write-up.Thoroughly insightful & very well depicted.Please keep enlightening us.

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